FOCUS ON AG
Written by Kent Thiesse
February 28, 2022
RUSSIAN INVASION IMPACTS ON THE U.S. AGRRICULTURE INDUSTRY
The Russian invasion of Ukraine has taken over the news cycles across the United States and around the World in the past couple of weeks. This development could have a large impact on the daily lives of citizens and overall economies in many countries across the globe. The U.S. agriculture industry has been in a highly volatile state in recent years due to trade war with China, the Covid pandemic, and extreme weather events. Now the Russian invasion and pending crisis in Ukraine could create another new set of challenges for farmers and the ag industry.
Ukraine has often been nicknamed the “Breadbasket of Europe” due to its strong agricultural production and importance to supplying the food needs of other European and Middle Eastern countries. The Ukraine is a major producer and exporter of corn and wheat. Grain from both Ukraine and Russia are shipped through ports in the Black Sea, which have now been closed due the Russian invasion. The combination of Ukraine and Russia account for approximately 30 percent of global wheat exports and 20 percent of world corn exports. China is a major importer of Ukrainian corn, which could force China to source more corn from other countries. Ukraine is also the world’s largest producer of sunflowers and is the largest exporter of sunflower-seed oil, a key component of the global supply of vegetable oil, which plays an important role in the world food supply.
The immediate reaction to the Russian invasion of the Ukraine on the grain markets has been highly volatile and quite mixed in the days since the invasion was initiated. Grain market movement for futures contracts on Chicago Board of Trade (CBOT) have had wide swings both up and down from day-to-day and even within the same day in the past couple of weeks. Producers that want to take advantage of upswings in the grain markets need to have a plan and be ready to initiate a market action once the market price reaches their planned objective. Similarly, there has been some wide price movements in the livestock futures prices for fed cattle and hogs. Continuation of the high level of volatility in the grain and livestock markets will likely be dependent of the worsening or easing of the Russian situation and the ability of the Ukrainian farmers to plant and harvest the 2022 crop, as well as U.S. prospects for 2022 crop production and agriculture export levels to China and other countries.
Crop input costs in the U.S. for fertilizer, chemicals, fuel, repairs and labor have already increased substantially for the 2022 growing season, prior to the Russian invasion of Ukraine. Now those price increases may be even more significant later this year; however, a new concern may be accessing needed farm inputs. Russia and Ukraine are important suppliers of many fertilizer products and important minerals. Russia is the is a low-cost and high-volume producer of most major fertilizers in the world, so any trade sanctions by the U.S. and other countries that involve the shipment of fertilizer could greatly impact the supply and price of fertilizer going forward. Russia is also a major supplier of oil and natural gas to European countries, which could potentially have a large impact on the global ag industry if the tension in Ukraine continues. Russia and Ukraine are also important suppliers of the world needs for aluminum, nickel, copper, cobalt, and neon gas, all of which have importance to U.S. agriculture.
Farmer strategies during these volatile times:
- Access to inputs may be just as important as the price of inputs.
As was pointed out earlier, there could be potential worldwide shortages of some important fertilizer products and other crop inputs. Even if farmers have “locked-in” their supply of fertilizer, chemicals, LP or natural gas, fuel, etc., there could be supply issues if shortages become too severe. Suppliers have the ability to enforce “force majeure” in extreme situations, which allows the seller of a product under contract not deliver due circumstances beyond their control. Recently, one major supplier of glyphosate, an important herbicide for corn and soybean production, enacted “force majeure” on glyphosate supplies due to issues beyond their control. There are also severe backlogs with getting new farm machinery and delays in getting some needed parts for repairs.
- Use the right grain marketing tools during highly volatile markets.
Grain and livestock markets have been highly volatile in recent months due to strong domestic and worldwide demand. The Russian invasion of Ukraine has resulted in very wide upward and downward swings in the commodity markets on the CBOT and this is likely to continue in the coming weeks, especially if we have weather issues with the U.S. crop in the coming months. Many farmers like to use CBOT “hedge-to-arrive” contracts to “lock-in” grain prices; however, it is important to remember that producers are required to deliver the grain in a “hedge-to-arrive” contract, even if grain prices continue to increase substantially in the coming months. Using an options strategy to protect downside market risk while keeping upside market potential may be a safer grain marketing strategy during these times of enhanced market price uncertainty. The best marketing advice is to follow a farm’s grain and livestock marketing plans that are based on the “cost of production” and profit potential. However, those marketing plans should be updated regularly based on changes in grain and livestock market fundamentals and adjustments in operating expenses. Make the adjustments, but do not abandon a good marketing plan with well-thought out strategies, and potentially miss some good profit opportunities.
- Make more frequent adjustments to cash flow projections.
Many farm operators work with their farm business management advisors and ag lenders in December or January to prepare a cash flow projection for the coming year that projects crop and livestock revenues, operating expenses, debt payments, capital expenditures, etc. Given the current and likely future volatility in grain and livestock market prices, the rising input costs, along with the likelihood of increasing interest rates and higher costs of capital purchases, it is more important than ever for farmers to work with their advisors to update their 2022 cash flow projections on a more frequent basis. Many factors have changed considerably since the beginning of the year. In addition, during volatile financial times it important to monitor farm finances in order to maintain a strong level of “working capital” in the farm operation and to keep the “current position” on a farm financial statement in a strong position.
- Risk Management is extremely important during uncertain times.
A good risk management plan for a farm business includes having solid grain and livestock marketing plans and “locking-in” the cost and supply of needed inputs. In addition, it is very important to carefully analyze the best farm program options and crop insurance strategies for your farm operation. March 15 is the deadline to sign up for Federal Crop Insurance with a crop insurance agent and to finalize the 2022 farm program choices at local USDA Farm Service Agency (FSA) offices. There are currently some very favorable Spring (base) prices available for 2022 Federal Crop Insurance policies, which should allow most grain producers to greatly reduce their risk exposure for the 2022 crop year. Check with a good crop insurance agent for the best crop insurance strategies on a given farm. It is also a good time to analyze other risks in the farm business and to take appropriate actions as necessary.
- Don’t panic and stay flexible to preserve profitability.
As we saw with the Covid pandemic in 2020, there can be a tendency to overreact to crisis situations such as we seem to be entering with the Russian invasion of Ukraine. Don’t get caught up in the “hype” of the daily news cycles and make quick “knee-jerk” farm business decisions based on immediate reaction to situations on the other side of the globe. On the other hand, stay “flexible” and don’t be afraid to make necessary adjustments to previous decisions that are based on changes and long-term trends in the U.S. and global economic situation. Always be looking for opportunities to increase farm profitability and to reduce risk, while maintaining the overall stability of the farm business.
Note — For additional information contact Kent Thiesse, Farm Management Analyst and Sr. Vice President, MinnStar Bank, Lake Crystal, MN. (Phone — (507) 381-7960) E-mail — email@example.com) Web Site — http://www.minnstarbank.com/